Oct 17, 2022 - Economy

"Bitcoin as safe haven" theory crumbles in face of persisting inflation

Illustration of a business person standing on a crumbling bitcoin.

Illustration: Gabriella Turrisi/Axios

Bitcoin as a safe haven against inflation, once accepted wisdom for crypto proponents, is proving questionable.

Why it matters: In the face of persistently high consumer price index prints, the world's largest and oldest digital asset has crumpled, eroding investor confidence that it can act as a safe haven during times of market turmoil.

State of play: Bitcoin has a sufficient history now to offer a dataset to be parsed and mined for patterns, giving way to theories about future price moves and the purpose it could serve in investment portfolios.

  • But they are just that, theories.
  • The pros Axios spoke with — investors, crypto experts and rubes, advisers, researchers and a professor — offered up their best explanations for why bitcoin isn't proving to be the great inflation hedge many expected it to be.

What they're saying: "'Bitcoin as an inflation hedge' was a decent story — not that I bought it," says Michael Batnick, managing partner at registered investment adviser Ritholtz Wealth Management, though he admits he is no crypto expert.

  • "With rates at zero, the Treasury mailing checks and printing money — that there could only ever be 21 million bitcoin was a compelling argument."
  • [But] you need to have your brain checked. [Bitcoin] is a risk asset. Period," Batnick tells Axios.

Flashback: Bitcoin started its ascent in 2020 to reach a peak near $70,000 in November 2021. To the moon, at the time, seemed an understatement.

  • "But so was everything," Batnick counters. "Everything went gangbusters. But was Gamestop and Home Depot an inflation hedge?"

A little nuance: David Lawant, director of research at Bitwise Investments, says people are looking at this the wrong way.

  • Rather than linking bitcoin to things like the Consumer Price Index, its relationship should be examined in relation to forward-inflation expectations.
  • "Although CPI is undoubtedly running hot in 2022, long-term inflation expectations have actually been flat, or even down, since late 2021/early 2022," Lawant says, citing 10-year forward and 5-year forward inflation expectation rates.

Hedge or risk asset? Yes. Bitcoin has many facets, according to Noelle Acheson, writer of the Crypto is Macro Now newsletter and formerly Genesis' head of market insights. It behaves like a risk asset, sometimes — and like a hedge at others.

  • "In the short term, Bitcoin will likely continue behaving more like a risk asset than an inflation hedge," she said.

Hard to judge. The markets don't make sense right now, says Greg King, CEO of Osprey Funds.

  • "After the 2008 crisis, [the] Fed took rates to zero for a long time. Lots of long-time managers were throwing up their hands. We’re in a similar situation now," he says
  • "When I see the CPI print goes higher and bitcoin sells off, it makes zero sense to me. The only way to rationalize that is the market sees that as indication of further tightening, otherwise it makes no sense."

It's all relative. "Bitcoin can better be represented as a currency debasement hedge and from a long-term perspective it has been holding up to that standard," Anthony Rousseau, TradeStation Crypto's senior director of product strategy, says.

  • "Over the past several weeks Bitcoin has held up quite well while equity markets have been making new lows. At this time, investors are having a difficult time justifying any safe places to hide out while this global liquidity squeeze takes place," he says.
  • Bitwise's Lawant also suggests examining the case of "Bitcoin as hedge" by evaluating its performance relative to other known portfolio ballasts, like gold.

Nothing to see here. There is no link, Thomas Conlon, associate professor of banking and finance in the University of Dublin College School of Business, says.

  • In a paper published Sept. 2021, titled Inflation and cryptocurrencies revisited: A time-scale analysis, Conlon found that there was no link between bitcoin and forward inflation expectations, with the exception of a moment during peak pandemic.
  • "Our findings were that there was a link between bitcoin returns and changes in inflation only during the very short period of time in 2020 when inflation expectations dropped rapidly," Conlon tells Axios.

Context: That's something both Bitwise and Professor Conlon agree on — there was the emergence of a link between forward inflation expectations and the price of bitcoin observed recently. Whether that link is meaningful is where they disagree, among other things.

The bottom line: What the pros mostly agree on are short-term price expectations for bitcoin. Summed up: More pain is likely.

  • "Recent changes in inflation expectations appear to be associated with decreases in the price of bitcoin," Conlon says. "Economically this makes sense, as increasing interest rate expectations make bitcoin less attractive in an environment where interest [rates] are no longer around zero."
  • "Since Bitcoin has been holding up in this range of $18,000 to $20,000 partly due to the long-term holders' cost basis, lower price levels could be seen if some of those holders capitulate for exogenous reasons due to the macro environment," Rousseau says.

(Editor's note: This article has been corrected to show Greg King is CEO of Osprey Funds, not Osprey ETFs.)

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